Question
An all-equity firm consists of a single project that will produce a perpetual cash flow of either $100M (good state) or $30M (bad state) next
An all-equity firm consists of a single project that will produce a perpetual cash flow of either $100M (good state) or $30M (bad state) next year. The probability of the good state is 30 percent. The beta of the asset cash flows is 1.25 and the risk-free rate is 3 percent and the market risk premium is 8 percent. There are 6M shares outstanding. Suppose the firm announces it will issue $40M in debt. The debt has an interest rate of 8 percent, and will mature in 3 years. Because the debt is ___ , any bankruptcy costs would ___ the firm's share price after the announcement.
a. Safe, not change
b. risky, raise
c. risky, lower
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